Union Government is expecting that public sector banks (PSBs) placed under RBI’s Prompt Corrective Action (PCA) framework will come out of it by the end of this year. As many as 11 out of 21 state-owned banks are currently under PCA framework.
Operational performance of PSBs has improved in April-June 2018 quarter, with steep reduction in net losses, increase in recoveries and significant improvement in provision coverage ratio. Besides, government is also providing PSUs adequate capital when required. Some of capital already has been given, as recoveries is taking place and there is possibility that some banks will not need it. As of now, there no bank is breaching regulatory norms prescribed by RBI.
Prompt corrective action (PCA) framework
PCA framework is supervisory tool of RBI, which involves monitoring of certain performance indicators of banks to check their financial health as early warning exercise and to ensure that banks don’t go bust. Its objective is to facilitate banks to take corrective measures including those prescribed by RBI, in timely manner to restore their financial health. It also provides opportunity to RBI to pay focussed attention on such banks by engaging with management more closely in those areas.
PCA framework is invoked on banks when they breach any of three key regulatory trigger points (or thresholds). They are capital to risk weighted assets ratio, net non-performing assets (NPA) and Return on Assets (RoA). Depending on risk thresholds set in PCA framework, banks are put in two type of restrictions, mandatory and discretionary depending upon their placement in PCA framework levels. The mandatory restrictions are on dividend, branch expansion, directors compensation while discretionary restrictions include curbs on lending and deposit.